Telekom's 74 percent stake in new T-Mobile could later be sold at a nice profit.

Eighteen months ago, when AT&T tried to acquire T-Mobile, Ma Bell argued that only it could save the struggling number four carrier. As Ars pointed out at the time, AT&T’s own documents pounded T-Mobile for facing "substantial commercial and spectrum-related challenges," losing customers "for nearly two years," and having "no clear path to LTE."

The conventional wisdom among industry analysts was that Deutsche Telekom, T-Mobile’s parent company in Germany, has been looking to unload its American subsidiary for about a decade either through an initial public offering (IPO), or a direct sale. Telekom needs the money as it still has about €40 billion ($51 billion) in corporate debt and wants to shore up operations in its home markets in Europe.

But with the new announced merger with MetroPCS, analysts say that Deutsche Telekom has given itself a much better path to higher profits in the United States one way or the other.

The specifics of the deal are that MetroPCS will declare a 1-for-2 reverse split, thereby cutting the existing level of stock in half. MetroPCS—the first company in America to launch LTE—will also pay $1.5 billion to its shareholders and acquire all of T-Mobile’s stock. However, Deutsche Telekom will still retain 74 percent ownership in the new company.

In other words, the deal has injected the new company (which will still be called T-Mobile) with viability, but provides Telekom with a chance to make a nice profit should the company want to sell its large stake.

"A complete exit is probably an overstatement, but this gives [Deutsche Telekom] a relatively simple mechanism for dialing back their exposure in the US market," Craig Moffett, an analyst with Bernstein Research, told Ars.

"They’ve made no secret of the fact that they’ve been willing to sell it, they’ve talked about IPOing it. You have to take this at face value that this is not an exit from the US market. It is an incremental investment in a stronger US asset, albeit one that has a built-in exit door."

T-Mobile, bigger and badder than ever before

Of course now, in late 2012, T-Mobile is in a much more attractive position than it was just a year ago. In the aftermath of the collapsed deal last year, AT&T paid $3 billion cash plus some spectrum rights to T-Mobile, no doubt a significant amount went towards the latter’s LTE upgrade plan.

"So [T-Mobile is] actually in much better shape now than it was before, with an LTE strategy underway and a better spectrum position," Jan Dawson, a telecom analyst, told Ars. "The one thing it still faced was a lack of scale and the threat from smaller regional prepaid players, who were increasingly targeting the national value market, which is T-Mobile’s bread and butter.”

He added that while there is no longer the same level of urgency to extricate itself from the American market, if the new company does well as a publicly traded company, then Telekom could sell part or all of that off.

"Overall, Telekom needs money to invest in its domestic and slower-growing businesses, so I would expect it to try to extract some value through selling part of its stake over the next few years, but I don’t see this purely as an exit strategy," he said. "I see it more as a way to make T-Mobile successful, which could pay off in a couple of different ways for Deutsche Telekom."

Telekom faces much more competition in its home country of Germany, where there are other big players, like Vodafone, O2 (Telefonica), and E-Plus to content with, not to mention the myriad of prepaid MVNO providers. In public statements, the company called its most recent quarterly drop in German mobile revenues "unsatisfactory," and across all of its properties in Europe, posted a revenue drop of 5.9 percent.

Telekom's exit or re-entry

Still, analysts seem to think that such an exit is not going to come anytime soon.

"I have a hard time believing that [a Telekom exit is imminent] because there’s too much at stake," Brian Blau, a Gartner Research analyst said. "33 million customers is a nice customer base. Now they stand a chance at becoming number three if they can execute—then you have to think that’s a viable business."

Indeed, it will take some time for the new company to fully transition to a pure LTE GSM setup.

"I think having a publicly traded equity allows Deutsche Telekom...an exit strategy should they choose to take one, but it certainly seems like they’re re-committing to the US with this transaction," said Christopher King, an analyst with Stifel, Nicolaus. "It would be challenging for the parent to sell during a three to five year network integration and upgrade cycle."

40 Reader Comments

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

This does make them interesting as an option moving forward. Will be interesting to see how this shakes out over the next few months. Also, I wonder if Sprint might find a Tmobile merger option tempting, as that would move them much further along as well.

T-Mobile's current strategy is precisely what I want out of a carrier in the US. Reasonably priced no-contract plans and no insultingly low data caps or the BS "shared plans" which do nothing more than extract more revenue for Verizon and AT&T. For AT&T to charge a separate fee for unlimited texting, a bucket of minutes, and a paltry amount of data on contract to come out to 80+ bucks after taxes is absurd for an individual.

T-Mobile's current plan is to move all of its HSPA+ network to 1900 MHz PCS, which means essentially any UMTS phone with US frequencies (including the iPhone) will work at 3/3.5 G, and they'll move all of their AWS spectrum for 4G LTE (currently being used for T-Mobile 3.5/"4G" HSPA+), so plenty of devices already out today and in the future will work with their network (including the iPhone 5).

If they could get some decent freaking coverage where I live I'd highly consider switching to that 30 dollar a month pre-paid option they offer. However it's nothing but Edge where I am so Straight Talk is a much better deal.

This does make them interesting as an option moving forward. Will be interesting to see how this shakes out over the next few months. Also, I wonder if Sprint might find a Tmobile merger option tempting, as that would move them much further along as well.

Hesse already tried doing a merger with MetroPCS several months ago but the board shut him down. You won't see Sprint and T-Mobile merging anytime soon. It'd be a worse fit than Nextel was.

"...Telekom's 74 percent stake in new T-Mobile could later be sold at a nice profit...."

and that's what's all about, isnt it?!? Making the greedy stockholder and the "top management" happy, nothing else.

Reminds me somehow of the comedy movie "Fun With Dick And Jane"....

Oh, and you know, employees of Telekom who can probably be assured of continual employment, along with, you know, the services, contractors, manufacturers, etc that Telekom spends money on, and their employees, etc etc. It's almost like it's an economy or something...

Glad T-mobile is finally growing some balls. I think once they realign their 3g network with att they will be more attractive to the average consumer. Really wonder what sprint is going to do, their lte network is pretty weak (5x5 MHz) and they're in debt up to their eyeballs. It seems betting the farm on wimax really hurt them, they should consider buying clear outright to get access to their spectrum pool.

atlana wrote:

"...Telekom's 74 percent stake in new T-Mobile could later be sold at a nice profit...."

and that's what's all about, isnt it?!? Making the greedy stockholder and the "top management" happy, nothing else.

Reminds me somehow of the comedy movie "Fun With Dick And Jane"....

Yes, people who invested in a company needs are put before random internet posters. Who would have thought right?

"So [T-Mobile is] actually in much better shape now than it was before, with an LTE strategy underway and a better spectrum position," Jan Dawson, a telecom analyst, told Ars. "The one thing it still faced was a lack of scale and the threat from smaller regional prepaid players, who were increasingly targeting the national value market, which is T-Mobile’s bread and butter.”

Just curious - what smaller regional carriers is he referring to?

(Oh, and thanks, Uncle AT&T, for the nice present! You'll be proud of how it is spent.)

Really wonder what sprint is going to do, their lte network is pretty weak (5x5 MHz) and they're in debt up to their eyeballs. It seems betting the farm on wimax really hurt them, they should consider buying clear outright to get access to their spectrum pool.

Sprint has Clearwire in their pocket, and Clearwire is planning on deploying 5000 cell towers in urban metro areas with TDD-LTE-Advanced at 20MHz, with future capacity boosts up to 40 or even 100MHz (where possible, they own anywhere between 75MHz and 196MHz in most metro areas) when the LTE-Advanced equipment matures.

T-Mobile definitely has the assets to move forward to make themselves more valuable as well. The M-PCS spectrum should allow them to get to 20x20MHz LTE in most major areas by the end of 2015. By comparison, AT&T will have two 10x10 blocks by then (700MHz, 2.3GHz WCS), Verizon will have two blocks, 10x10 in the 700MHz band and another 10x10 (or 20x20 in dense cities) in the AWS band, and I mentioned Sprint's assets above.

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

T-Mobile offers three ways to obtain a phone:

1. Sign a two year contract and receive a subsidized phone. This is basically what other US carriers offer.

2. Obtain service and finance the phone. Give them a down payment and finance the balance over 20 months. No contract necessary (but if you discontinue service before paying off the balance it will become immediately payable to T-Mobile).

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

I've done the math and it's not worth it. You save 5-10€ depending on where you order when you get a contract without a new iPhone. So in two years you are actually paying more when you bring your own device.

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

T-Mobile offers three ways to obtain a phone:

1. Sign a two year contract and receive a subsidized phone. This is basically what other US carriers offer.

2. Obtain service and finance the phone. Give them a down payment and finance the balance over 20 months. No contract necessary (but if you discontinue service before paying off the balance it will become immediately payable to T-Mobile).

3. Buy the phone outright.

I really wish they would push 2 and 3 more than they push 1, one is a horrible way of getting service that we really need to get more Americans off of for 2 and 3 instead, all this spectrum might finally allow them to do that

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

I've done the math and it's not worth it. You save 5-10€ depending on where you order when you get a contract without a new iPhone. So in two years you are actually paying more when you bring your own device.

You can save up to half per month. Straight Talk is 45 a month (and can go through T-Mobile's network). T-Mobile's best data pre-paid plan is 30 dollars a month. You would save hundreds of dollars.

I've done the math and it's not worth it. You save 5-10€ depending on where you order when you get a contract without a new iPhone. So in two years you are actually paying more when you bring your own device.

In the US, T-Mobile non-contract plans are much better than anything offered by AT&T or Verizon. It also depends on whether you want more minutes or more data, so comparisons across carriers are not straightforward.

What held a lot of people back is T-Mobile's non-standard frequency in terms of BYOD options. It looks like that limitation will mostly go away once this merger is complete and the bands eventually reshuffled.

(Of course by the time that all happens T-Mobile/Metro may also change some of the plans, which could be good or bad for the customer depending on their business priorities.)

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

I've done the math and it's not worth it. You save 5-10€ depending on where you order when you get a contract without a new iPhone. So in two years you are actually paying more when you bring your own device.

You can save up to half per month. Straight Talk is 45 a month (and can go through T-Mobile's network). T-Mobile's best data pre-paid plan is 30 dollars a month. You would save hundreds of dollars.

Again, I was just replying to the original posters who wished for T-Mobile Europe's support for BYOD. Here in Germany it is actually not cheaper, at least when going the Apple route.

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

T-Mobile offers three ways to obtain a phone:

1. Sign a two year contract and receive a subsidized phone. This is basically what other US carriers offer.

2. Obtain service and finance the phone. Give them a down payment and finance the balance over 20 months. No contract necessary (but if you discontinue service before paying off the balance it will become immediately payable to T-Mobile).

3. Buy the phone outright.

I really wish they would push 2 and 3 more than they push 1, one is a horrible way of getting service that we really need to get more Americans off of for 2 and 3 instead, all this spectrum might finally allow them to do that

They did when I went to subscribe last month. The first is referred to as the "Classic" plan and the salesman told me unless I had a specific reason to choose it I should avoid it.

He stated with the classic plan the monthly cost remains the same even after the phone subsidy has been recovered. The second one is called the "Value" plan. With the value plan you're financing the phone separately from the plan. You'll be billed for the service and 1/20th the remaining cost of the phone. Once 20 months have pass the remaining cost of the phone is zero so the monthly payment decreases by the 1/20th amount.

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

I've done the math and it's not worth it. You save 5-10€ depending on where you order when you get a contract without a new iPhone. So in two years you are actually paying more when you bring your own device.

In my case, I saved $10 per month on voice and another $10 a month on data, which means $440 over a 22-month contract. So yeah, it saves me money.

T-Mobile's current plan is to move all of its HSPA+ network to 1900 MHz PCS, which means essentially any UMTS phone with US frequencies (including the iPhone) will work at 3/3.5 G, and they'll move all of their AWS spectrum for 4G LTE (currently being used for T-Mobile 3.5/"4G" HSPA+), so plenty of devices already out today and in the future will work with their network (including the iPhone 5).

You need to go back and look at their plan again. They are converting SOME of the 1900 PCS that has 2g into HSPA+ for 3g/4g and then taking SOME of their AWS and using that for LTE. Completely dropping their 2g in PCS or HSPA in AWS would require replacing a HUGE number of handsets as they still have old 2g phones in use, especially among prepaid users, and many of their early hspa+ 14.4 and 21mb phone don't support HSPA on the PCS band (like the G2, G2x and many similar phones). Only fairly recently have their phones started supporting HSPA on the PCS bands.

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

I've done the math and it's not worth it. You save 5-10€ depending on where you order when you get a contract without a new iPhone. So in two years you are actually paying more when you bring your own device.

You can save up to half per month. Straight Talk is 45 a month (and can go through T-Mobile's network). T-Mobile's best data pre-paid plan is 30 dollars a month. You would save hundreds of dollars.

Again, I was just replying to the original posters who wished for T-Mobile Europe's support for BYOD. Here in Germany it is actually not cheaper, at least when going the Apple route.

Sorry fo the confusion, I meant two different things:

1. Cheaper, no-contract service2. BYOD as a value-add, not a cost savings.

The former (compared to subsidized plans), is where I was talking about saving money. BYOD is just a nice bonus.

Completely dropping their 2g in PCS or HSPA in AWS would require replacing a HUGE number of handsets as they still have old 2g phones in use, especially among prepaid users, and many of their early hspa+ 14.4 and 21mb phone don't support HSPA on the PCS band (like the G2, G2x and many similar phones). Only fairly recently have their phones started supporting HSPA on the PCS bands.

Disruptive technology transitions are rarely desirable for all concerned, but in two year's time all of today's contracts will have run out, and the month-to-month customers by definition have little claim to stability.

It will be a calculated gamble on how aggressively to push the changes, and how to structure incentives for handset replacement. They will undoubtedly lose some customers, yet potentially gain far more when all is done. There's no way to please everyone in this game.

Since everything is converging on LTE, the old carrier network divisions are becoming less meaningful. By going home with mPCS, t-mobile cuts about a year out of their deployment plan. Compared to where both companies were this time last year, it's a stroke of genius on both parts. What a turnaround.

If they could get some decent freaking coverage where I live I'd highly consider switching to that 30 dollar a month pre-paid option they offer. However it's nothing but Edge where I am so Straight Talk is a much better deal.

Ditto. However this is AT&T territory and it's 3G. Boost seems to be popular as well.

I have T-Mobile. One of the grandfathered $95/m unlimited plans. And, I mean, unlimited. With all the services and at least 120m of intl. talk very month (I am French - voice to my family comes in addition to my plan) the most I have ever paid is $114 for a single month. By comparison, the rate I would have to pay ATT is $165/m for the same service. So, yes, I paid $400 for my phone 2 years back, but it would have been repaid in about 8 months....OTOH, I also had ATT (and a fucking POC of an iPhone 4) through work for more than a year, with markedly shittier coverage (in the Bay Area), and my wife and kids have Vz, with... just marginally better coverage, for an arm and a leg every month... I know, I am the one paying $280/m to Vz for their access to 21st century connectivity... or, some scam masquerading for it.

And thus the stupidity of the whole model in the US - get a Samsung Galaxy S3 on a 48months interest free at the local Noel Leeming in NZ then hook it up to the plan you want and voila no gouging life sucking contracts. I really look at the model there is in the US and question just how sustainable it is to sell phones worth almost a grand at US$199 then allow the end user to onto any plan they want with some how that cost of the phone being recovered let alone the cost of providing the service. It is one of those times I wonder how on earth the system in the US actually functions when from the outsiders perspective it looks like a giant clusterfuck.

If the new T-Mobile pushes hard on the European model of buying the phones up front for cheaper service, I'm all about switching when my contract expires. Especially since that generally means active support for BYOD.

I've done the math and it's not worth it. You save 5-10€ depending on where you order when you get a contract without a new iPhone. So in two years you are actually paying more when you bring your own device.

You can save up to half per month. Straight Talk is 45 a month (and can go through T-Mobile's network). T-Mobile's best data pre-paid plan is 30 dollars a month. You would save hundreds of dollars.

I'm on the $30 unlimited text/100 voice minutes/5g data plan. It's supposedly a "special" offer through wal-mart. What's infuriatingly twisted about it is they sell the plan on the t-mobile website along with the rest. At no point while ordering my phone from t-mobile.com did it say this plan was only available to those who buy the phone from wal-mart. I got the phone in the mail and had trouble activating it, went online to research why, and find out this important little tid-bit. Some comm enters said they eventually got t-mobile to relent and give them the plan without buying a sim card from wal-mart by yelling at a manager. I was prepared to do that the next day but thankfully my phone just happened to activate on my fourth attempt on the website.

The only catch now though is that when putting my $30 down for the month, instead of simply putting money in my online account, I then also have to call them and wade through endless voice prompts before I speak to a customer rep who then sends me a text message telling me to pull the battery and sim then put it all back in and reboot. All this because it's a "special" plan offered through their partner! It's the best plan out there but they make you work for it.

Sorry to be hacking at Ars, which i love, but this article is all about the stock, DT corporate debt, IPO, etc, etc. This reads like a Bloomberg article from a analyst who, like all the rest, never covered a merge they didn't think was great.

Where's the tech?

I wanna know about technology synergies. Do their spectrum licenses mesh well? Does this get TMobo any beachfront spectrum in markets where they had been lacking? Does one have a good backhaul network that would help out the other? Does one favor LTE-TD and the other LTE-FD?(i know both are FD but you get the point)

"...Telekom's 74 percent stake in new T-Mobile could later be sold at a nice profit...."

and that's what's all about, isnt it?!? Making the greedy stockholder and the "top management" happy, nothing else.

Reminds me somehow of the comedy movie "Fun With Dick And Jane"....

Actually, the largest Telekom stockholder is the German government. The second largest group are small time investors. Deutsche Telekom exclusively marketed their stock as an investment for the common folk. Lots of people's retirement money is in that stock. So, yes it's their fault for being greedy...

Remember, we're the country that produced "Jersey Shore" and "Hee Haw". Stupidity is a birthright that some defend fiercely.

And charging the receiving party the cost of the call rather than the initiator of the call. If I ever moved to the US I would never get a mobile phone simply because I'm expected to pay for some one who decides to call me to which I have no say in the matter.

If I ever moved to the US I would never get a mobile phone simply because I'm expected to pay for some one who decides to call me to which I have no say in the matter.

Waaay back I used to be with Nextel, and they didn't charge for incoming calls. So there was at least one US carrier that offered this.

I'll say that free incoming calls can be a blessing and a curse. On the one hand I agree that I shouldn't be charged for someone else's actions that I had no control over (other than to hang up or refuse the call). On the other hand, answering the call does in fact incur a cost on the carrier in terms of bandwidth and radio usage.

How much it costs is another matter. I would be fine with the idea that incoming calls cost less to my account than outgoing calls, IF all the rates were lowered to something more reasonable. But the way things are structured in the US the carriers charge what the market will bear, and the market is rigged in their favor.

And I would argue that paying for incoming calls has one other perverse benefit. It provides a measure of 'harm' that one incurs with unsolicited marketing calls, for those so inclined to pursue violations to the Do Not Call registry. If all incoming calls were free, telemarketers would say that they are not causing any financial burden on cell phone users, and thus be immune to cost recovery for their practice. As it is now the incoming call fee weighed heavily on the decision to implement the DNC law. (How well it is enforced is a different matter entirely - don't get me started...)

It's similar to the Junk Fax legislations which hinged upon the cost to the recipients for their passing.

Also, if you moved to the US, I would recommend getting something like Google Voice as an intermediate call screener so you only have to deal with calls from people who are whitelisted. Everyone else goes to voice mail. (I don't know what is comparable internationally.)